At the end of the fixed-interest period of your current building loan, there is often still a remaining debt that has to be covered by follow-up financing. One of the options for follow-up financing is a forward loan. This allows you to secure the interest rate for a future financing arrangement during the term of your current loan. This can be particularly useful if you expect interest rates to rise. In the following text, you will learn how a forward loan works, what advantages it offers and what you should look out for.
- Forward loans lock in today's interest rates: You can lock in today's interest rates for future financing up to 66 months in advance.
- Take the interest premium into account: The longer the forward phase, the higher the interest premium – this is usually 0.01 to 0.02% per month.
- Planning security: a forward loan gives you financial security, as you know exactly how high your installments will be after your current interest rate lock-in period has expired.
- Binding: a forward loan is binding – you have to take it out even if interest rates fall.
Table of content
What is a forward loan?
A forward loan is a special form of follow-up financing that allows you to lock in today's low interest rates for the future. You agree on the interest rate in advance, even if you don't need the loan for several months or years. While your current loan is still running, no installments or commitment interest will be charged for the forward loan. As soon as the fixed interest rate period of your existing loan ends, the new financing is activated and the new fixed interest rate and monthly installment payments begin from that point on.
The lender secures the interest rate for a certain period of time and charges an interest premium for this. This gives you planning security, as you know how high your future installments will be up to 66 months before the end of the fixed interest rate – regardless of how the interest rate develops.
How does a forward loan work?
A forward loan works in a similar way to a traditional annuity loan, but with the advantage that you can fix the interest rate for your follow-up financing years in advance – up to 66 months before the end of the fixed-interest period of your current loan. This allows you to lock in the current interest rate and protect yourself from future interest rate hikes. When the fixed interest rate period of your existing loan ends, the forward loan is activated and replaces the remaining debt. Note that banks charge an interest premium for the lead time, which is higher the earlier you take out the loan.
As a rule of thumb, the longer the forward phase, the higher the interest premium.
What does a forward loan cost?
The interest rate of a forward loan is made up of the current building loan interest rate and an additional interest premium, which depends on the length of the forward phase. The longer the period between the conclusion of the contract and the payout, the higher the premium. As a rule, this is around 0.01 to 0.02% per month. For shorter periods (up to 12 months), some banks waive the premium. Important: The final interest rate remains fixed for the entire forward period.
Example
Let's assume you lock in a rate of 3% today for a loan of €200,000 with a forward period of 24 months. The bank charges an interest premium of 0.02% per month. This means that your interest rate will increase by 0.48% to a total of 3.48%. With a term of 15 years, your monthly installment would be around €1,380, compared to €1,350 without the surcharge. You should factor these additional costs into your planning to be well prepared in the long term.
Here is a brief overview of how the monthly installment changes depending on the forward phase and the interest rate surcharge. The longer the forward phase, the higher the interest rate surcharge and thus your monthly installment:
| Forward period (months) | Interest premium per month (%) | Total interest (%) | Monthly installment without premium (€) | Monthly installment with premium (€) |
| 12 | 0.02 | 3.24 | 1.350 | 1.365 |
| 24 | 0.02 | 3.48 | 1.350 | 1.380 |
| 36 | 0.02 | 3.72 | 1.350 | 1.395 |
| 48 | 0.02 | 3.96 | 1.350 | 1.410 |
What are the pros and cons of a forward loan?
Advantages
- Interest rate security: You can lock in today's interest rates for the future and don't have to worry about rising interest rates.
- Planning security: You already have a precise overview of the costs you will incur in advance.
Disadvantages
- Interest premium: You pay a premium on the current interest rate for the period between conclusion and disbursement, which can make the loan more expensive.
- Binding nature: You have to take out the loan in any case, even if interest rates fall.
Is a forward loan binding?
The conclusion of a forward loan is binding. With your signature, you agree to take out the loan after the forward phase, even if interest rates have fallen in the meantime. It is important not to make any misjudgements here. You are basically locking in a future interest rate today – and that can entail both opportunities and risks. Comprehensive advice is therefore crucial to ensure that you get a good deal and benefit from stable interest rates in the long term.
